Our previous view: In our report, China Steel Sector: Reality versus
policy, published on March 5, 2009, we highlighted three positives: (1)
the Rmb4 trillion economic stimulus program; (2) China’s aggressive
monetary easing as of 4Q08 bringing about a potential uptick in
industrial production growth as of 2Q FY09; (3) a series of supportive
policies from the government. However, we expected neither a quick
turnaround nor a sustainable recovery in China’s steel sector because we
had forecast that: (a) steel demand from China’s real estate sector would
fall 10% on weak property investments; (b) demand from the
mechanical equipment sector would decline 4% Y/Y due to a slowdown
in exports of mechanical and electrical goods; and (c) net exports would
fall 57% Y/Y due to the global economic recession.
• Our current view: We believe China’s steel sector may have bottomed
out because: (1) many of the steel’s downstream sectors have witnessed
an earlier- and stronger-than-expected recovery, due to (a) China’s
proactive monetary policy, which has proven effective in bringing about
increased industrial output growth, and (b) China’s aggressive fiscal
spending program, which has provided a major boost to China’s steel
demand; and (2) the growth in China’s real estate sector’s floor space
under construction appears to have bottomed out. Historically, there has
been a strong correlation between crude steel’s apparent demand growth
and Y/Y growth in real estate sector’s floor space under construction. It
remains to be seen whether the steel sector will enjoy a new sustainable
rally from here due to three key risks: (1) the overcapacity issue; (2) if
private investment growth and export demand fail to recover, and public
investment growth and domestic consumption growth run out of steam in
2H09 or 1H10, China steel sector’s recovery may be nipped in the bud;
(3) the sustainability of China’s property sector recovery.
• We upgrade Maanshan to OW, Angang to Neutral: We raise our
FY10 crude steel demand estimate for China by 10.2%, and our earnings
forecasts for Maanshan and Angang by 198% and 230%, respectively,
from a low base to factor in our higher sales price and volume forecasts.
We also upgrade our rating on Angang-H from UW to Neutral, and on
Maanshan-H from Neutral to OW to reflect our more positive view on
the steel sector. We raise our Jun-10 PT for Angang-H from HK$5.2 to
HK$13.8, based on 1.6x FY10E P/BV, and for Maanshan-H from
HK$2.9 to HK$6.2, based on 1.5x FY10E P/BV.